September 25, 2013

No matter what Schäuble-Merkel or Wolf think, Europe will not survive if it does not rid itself of Basel II and III

Sir I refer to Martin Wolf’s “Germany’s strange parallel universe”, September 25.

Bank regulators have based and still base their capital requirements for banks on how borrowers could fail and not, as they should, on how banks could fail, as entities and in allocating credit to the real economy. For instance, instead of observing themselves the credit ratings of any bank borrowers, they should be observing what bankers do when they see those credit ratings.

And so when the Basel Committee regulators introduced risk-weighting into the capital requirements for banks they created huge distortions, which have proven to be not only very dangerous for the safety of the European banks, but which also impedes bank credit to be efficiently allocated in Europe.

And that unpardonable mistake caused the crisis in Europe, and blocks any real European economic recovery, and this no matter what other route Europe takes, be it Schäuble’s and Merkel’s, or one that Martin Wolf could agree with.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.